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June 7, 2011

What I'm Telling Clients About the State of U.S. Economy

With the U.S. debt-to-GDP ratio around 100%, chronically high unemployment, a $2.8 trillion Fed balance sheet, extremely low interest rates, and 2.0% GDP, is America headed for trouble? Moreover, if you agree with this view, do you tell your clients? And if we share this view with clients, would it have a negative effect? Let's explore these questions.

The Ticking Time Bomb
There is no doubt that the near collapse of our financial system in 2008, and inevitable global fallout, was severe. I believe that it was probably much worse than many of us were told. On many occasions I have been asked if I believe we can pull out of this tailspin. For a while, I was unsure, but hopeful. However, I've recently have had a big change of heart on the matter and believe the odds of Washington getting it right are very, very slim. Why?

Over the weekend I was watching the news and heard that a particular presidential candidate was going to skip the Iowa caucus. Why? Because he has opposed farm subsidies and since Iowa is a big farming state, he didn't believe he would do well. Then it hit me. Everyone wants government to cut spending, but no one wants their program cut! Even if some groups did agreed to cuts, if other groups were to resist cuts, then the agreeable groups might decide that since the others are not going to sacrifice, they won't. In short, we've had too many years of politicians "bringing home the bacon." The social programs are too entrenched!

The Way Out?
I only see three possibilities to get this great country back on the right track:

If a candidate could win public opinion (in the fashion of Ronald Reagan) by promising to spread the pain equally, then it may be possible to stop the nose dive. This assumes that enough Americans would agree to put the country first. However, with the opposing party's political machinery, I doubt this would happen.

If we could elect enough new politicians (or change the minds of those in power), then we could fix the problem. However, that could take a while.

If a politician were to win by running on one platform (i.e.; no cuts or few cuts) and delivering a different platform (i.e.; massive cuts), then we might have a chance. In essence, he would have to lie on the campaign trail.

Actually, as I think about it, number three is more like the status quo.

The Conclusion

I believe it will take another, more serious crisis to get the attention of Washington. However, the last crisis, in 2008,

brought about a massive amount of new spending ($3.1 trillion, by my count), more bureaucracy, and a plethora of new social programs. "You never want a serious crisis to go to waste" was the utterance by Obama’s Chief of Staff, Rahm Emanuel, in November 2008. Go to waste? Yes, I think it certainly has!

So What Should You Be Telling Clients?

I have not been shy about discussing this with clients. Is this a good idea? I can't say for sure, but one client’s reaction sums it up well. He said, "This is so dire, I'm glad I have you to advise me." I hope I can live up to the task.

What about you? How are you positioning your clients’ assets? What messages are you telling them?